This announcement is especially noteworthy as it comes on the heels of e-book sales figures reported by the Association of American Publishers, which show steady declines so far this year. It also comes right after remarks about subscription services that Carolyn Reidy, President and CEO of Simon & Schuster, made at the Book Industry Study Group's annual meeting in New York last Friday. Reidy explained the parameters of the financial model behind such services, or at least behind Simon & Schuster's deal with one of them: when a user selects a book from a subscription service's catalog and starts to read it, the author gets a royalty as if it were a sale of that book.

No wonder Reidy expressed skepticism about the future of subscription e-book services -- and no wonder Amazon does not offer any titles from "Big Five" trade publishers (such as Simon & Schuster) through its subscription service, Amazon Kindle Unlimited. If we compare these services with paid subscription music services like Spotify Premium,
Apple Music, and Rhapsody, it becomes clear that with this financial model, the subscription e-book model is not viable for service providers in its current form.

Let's start with the kinds of audiences that these services attract. They attract "grazers" who want to sample a wide variety of content at a fixed price. Someone who only wants to read a book or two per month will buy those books; someone who only wants to listen to a few songs over and over will buy them on iTunes or Amazon MP3. Music grazers will listen to a variety of songs on a service like Spotify; Spotify will pay record labels the same amount of royalties (more or less) regardless of whether a given user listens to a small number of songs over and over again or a large number of songs once each. And Spotify pays labels about two orders of magnitude per stream less than a download site like iTunes or Amazon pays per purchase.

In contrast, an e-book grazer is much more likely to read portions of several books and not finish some of them. Yet publishers get royalties for those books as if the users read each one in its entirety. It's a great deal for users: if someone grazes, say, 10 books a month, that's well over $100 that she would have spent on books or e-books if she had bought them piecemeal.

Furthermore, e-book subscription services do not offer current (frontlist) titles from major publishers; instead they offer older (midlist or backlist) titles, as well as titles from indie publishers. This means that people who like to read the latest hot titles won't join, all but guaranteeing that subscribers are grazers who will generate disproportionate royalty payments to publishers and authors. In contrast, Spotify and its ilk offer most of the latest hits, which attract mainstream listeners and not just music geeks.

The result is that even when the magnitude of royalty payments isn't taken into account (and of course those details are confidential), e-book subscription services are forced to pay comparatively more in royalties, and assume much more financial risk, than their musical analogs. While an on-demand music service is merely arbitraging numbers of songs played per month against the $10 that subscribers pay for it, a subscription e-book service is also arbitraging unfinished book reads. Spotify -- the largest "pure play" music subscription service -- is losing more and more money each quarter; the situation for e-book subscription services (at least those that aren't able to cross-subsidize revenues) has got to be even worse.

The structural problem is that whereas single-song consumption is well established in the music industry, the book publishing industry has virtually no understanding of, let alone financial mechanisms to support, book grazing. It will be necessary to find new models for all-you-can-eat e-book reading; this will require change and disruption throughout the industry. Not only will it require creating new payment schemes for online e-book services, but in many cases, book publishers will need to renegotiate their agreements with authors to arrive at reasonable and equitable royalty streams. This will be harder than it is in the music industry, for several reasons.

First, book publishers tend to own fewer rights in authors' works than record labels own in music recordings and compositions, meaning that book publishers have less flexibility in negotiating with service providers than record labels do. Second, while the world of music royalties is a big "sausage factory," certain aspects of it are negotiated in one place for all or many parties -- through so-called blanket licensing -- while this is not true at all in book publishing. Third, major trade book publishers currently operate under heavy antitrust scrutiny after the Department of Justice's actions against the them and Apple, meaning that they will have an even harder time affecting change in an orderly way than they might otherwise.

Finally, major publishers' conservatism will make it difficult for startup companies to launch viable new models. They generally prefer to deal with startups that already have large audiences rather than those that merely have promise. "Major indie" publishers like Perseus Book Group and SourceBooks are often eager to try new models, but the experience of Oyster has shown that e-book services can't succeed without the Big Five of Hachette, HarperCollins, Macmillan,
Penguin Random House, and Simon & Schuster.

This means that the only companies that stand a decent chance of bringing new models to market will be those that have other sources of revenue, or those that are funded by VCs who can pump lots of money into them in order to disrupt the market while they build their user bases. Amazon is the classic example of the former, though Oyster's primary competitor Scribd does have other sources of revenue. I'll talk about some startups that fall into the latter category in a future column.